Oil Search blames $A for PNG woes

Oil Search said the higher-than-expected Australian dollar, delays accessing land, bad weather and logistics problems have combined to cause a 20 per cent cost blow-out at the Exxon Mobil-operated Esso Highlands liquefied natural gas project in Papua New Guinea.

Managing director Peter Botten told analysts on Monday morning that Oil Search, the second biggest stakeholder in the joint venture that is also co-invested by Santos, would be seeking more information from Exxon in the coming days.

“Overall unfortunately it’s a disappointing cost outcome, one that we wish to understand substantially more about and we have a dialogue ongoing to fully understand," Mr Botten said.

The companies said in a statement today that foreign exchange was the largest single contributor to the $US3.3 billion blowout to $US19 billion, contributing $US1.4 billion in the latest revision. Throughout the duration of the project, foreign exchange has contributed $US2.1 billion in increased costs.

“That’s one area where we are seeking greater levels of understanding about the forward use of and impact of FX," Mr Botten said.

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“Clearly to a degree our FX exposure is driven by the amount of Australian dollar and Kina contracts that are required to complete the contracts."

Exxon has not put in place foreign currency hedging contracts because of its project financing agreements, Oil Search said, and it has forecast the remainder of the project will be built at a rate consistent with the current USD to AUD spot exchange rate.

Mr Botten said the original forecast had the AUD and Kina “exposures and exchange rates substantially below those that we are experiencing now."

Work stoppages and land access issues added $US1.2 billion to the most recent cost estimate, while logistics added a further $US1.7 billion, Mr Botten said.

“Adverse logistics and weather conditions including rainfall well in excess of historical norms...have impacted the oversall project schedule and costs by about $US1.7 billion," he said.

The project is on schedule to start exporting LNG in 2014 and is now 70 per cent complete. Mr Botten said he was encouraged that the cost revision had indicated that the export potential would increase to 6.9 million tonnes a year from 6.6 million tonnes a year without additional capital cost tied specifically to the expansion.

Oil Search said that it would have to contribute another $US300 million in equity, but has ample liquidity to cover it, including an undrawn $US500 million revolving credit facility.

Santos chief financial officer Andrew Seaton said Santos had ample liquidity to fund all its capital programs including the additional $US130 million equity call on PNG LNG, with $6 billion in cash and undrawn credit facilities.